Unrealistic benchmarks in the Invitation to Tender encouraged overbidding

The latest Intercity East Coast franchise failed because the revenue projections underpinning the Virgin Trains East Coast (VTEC) bid were over-optimistic and it simply ran out of money, says the Transport Committee in a new Report: Intercity East Coast Franchise, published today.

Despite the successful day-to-day operation of the route—turning an operational profit and passenger satisfaction ratings among the highest performing long-distance franchises on the network—the joint venture between Stagecoach and Virgin was unable to continue to meet its premium obligations to the Department for Transport. The line went into technical default in January 2018 and the contract was terminated in June after just three years of operation. It was the third franchise failure since 2006.

Had the Department for Transport conducted appropriate due diligence and identified the weaknesses underpinning the bid, we may not have been in this position today. The Committee’s inquiry concludes that the setting of unrealistic benchmarks in the Invitation to Tender encouraged overbidding; the bid process lacked the necessary boundaries to discourage this; and the financial stress-testing of the bids was not robust enough. Therefore, the DfT must also take some responsibility for this franchise failure.

Network Rail does not bear any responsibility for the early termination of the franchise

Network Rail does not bear any responsibility for the early termination of the franchise, says the Report. The Committee found that the Department’s failure to provide Network Rail with formal sign-off of the infrastructure assumptions for the route would have undermined the franchise in future years. However, to date, Network Rail have provided all the infrastructure upgrades that it had formally committed to when this franchise was let.

The Committee’s Report considers what went wrong with the franchise; the interim operating arrangements; the East Coast Partnership; and wider franchising issues. Based on the current financial and regulatory framework, the Committee concludes that the East Coast Partnership is unlikely to provide scope for the step-change in performance that the Secretary of State might be anticipating. Before experimenting with this Partnership, we recommend the Secretary of State lay out in detail how the new partnership will work and conduct a proper assessment of its feasibility.

Chair's comments

The Chair of the Transport Committee, Lilian Greenwood MP, said:

"Franchises should be able to withstand normal fluctuations in the economic cycle. Naivety, over-optimistic expectations and a mismanaged bid process all played a role in the failure of this franchise—the third in little over a decade.

The Secretary of State pointed the finger at Stagecoach and Virgin for getting their bids wrong, but the Department is not blameless. Even now, there is no concrete plan, nor timescales, for the interim operator of this franchise. From our inquiry, we cannot be sure, and cannot reassure passengers or public, that the arrangements for the East Coast Partnership will more successfully overcome the systemic difficulties presented by the current set-up.

Following the failure of the East Coast line, there is talk that the Prime Minister has ordered a major review of rail franchising—we await more details. However, if this or any other future Partnership arrangement is truly going to deliver a step-change in performance for the passenger, more fundamental reform of our railways is required."